Difficulty: 2/3 (Not enough numbers; math is easy but concepts are hard)
Review: 4/5 (I guess it's okay)
We return to the definition of the competitive market: goods offered are identical for all the firms and there are so many buyers and sellers there is no market power. Added to the definition is that firms can freely join and exit the market.
We define average revenue as total revenue over output and marginal revenue as the change in total revenue with one additional output. Average revenue equals the price of the good.
Firms maximize profit by creating and selling until the marginal cost is equal to marginal revenue.
Firms can shut down or exit the market if conditions are not suitable. To shut down is to temporarily not create anything (still pay fixed costs) while to exit is long term. A sunk cost is something committed that cannot be recovered, like lost money. You shut down if P < AVC and you exit if P < ATC. This means firms consider exiting before shutting down, since there is a sunk cost if shutting down only.
Profit here is measured by (price - average total cost) * quantity. In the long run, exit and entry stops when price and average total cost are equal. This takes place at the efficient scale since its at the lowest point on ATC curve. Even if economic profit is zero, accountable profit is positive so that's why some business stay in the market even if they just meet the minimum.
When demand increases, in the short run there is profit, but over time more firms are created and equilibrium is stored so the intersection is at the no profit point. But, sometimes long run supply curve slopes upward because of limited land, pickiness of new entrants, etc. so economic profit could still exist even in the long run.
Monday, October 31, 2016
Tuesday, October 25, 2016
Economics: The Cost of Production
Difficulty: 2/3 (So many names for so many curves)
Review: 4/5 (Boring chapter, as Mankiw at least honestly puts it)
What are the costs for the supplier? There's profit, revenue - total cost. Total cost includes explicit costs which are direct costs that an accountant would know and implicit costs like what you could've been earning, only something an economist would take into account.
Random Fact: Industrial organization is the study of how firm's make decisions based off market conditions.
The production function graphs quantity of output in respect to number of workers and the total-cost curve graphs total cost in respect to quantity of output. The production function curves upwards steeply then more flatly because of diminishing marginal production as coordination becomes more difficult. The total cost curve curves upward slowly then steeply as marginal cost increases just as explained in production function.
There's fixed costs like rent but some costs are variable as output changes like number of workers hired or amount of supplies to make the product needed. This introduces average total cost, which includes average fixed cost and average variable cost too, each with their own unique curve on the total cost curve.
The average total cost curve is more steeply u-shaped in the short run, and is also dependent on size of the firm. In the long run, the ATC forms a very flat u-shape.
Economies of scale is when in the long run as output increases, ATC decreases, as shown with specialization. On the other hand, it is said to be diseconomies of scale if ATC increases as output increases, as shown with difficulty of coordination.
More information on the actual shapes of the curve can be found online.
Review: 4/5 (Boring chapter, as Mankiw at least honestly puts it)
What are the costs for the supplier? There's profit, revenue - total cost. Total cost includes explicit costs which are direct costs that an accountant would know and implicit costs like what you could've been earning, only something an economist would take into account.
Random Fact: Industrial organization is the study of how firm's make decisions based off market conditions.
The production function graphs quantity of output in respect to number of workers and the total-cost curve graphs total cost in respect to quantity of output. The production function curves upwards steeply then more flatly because of diminishing marginal production as coordination becomes more difficult. The total cost curve curves upward slowly then steeply as marginal cost increases just as explained in production function.
There's fixed costs like rent but some costs are variable as output changes like number of workers hired or amount of supplies to make the product needed. This introduces average total cost, which includes average fixed cost and average variable cost too, each with their own unique curve on the total cost curve.
The average total cost curve is more steeply u-shaped in the short run, and is also dependent on size of the firm. In the long run, the ATC forms a very flat u-shape.
Economies of scale is when in the long run as output increases, ATC decreases, as shown with specialization. On the other hand, it is said to be diseconomies of scale if ATC increases as output increases, as shown with difficulty of coordination.
More information on the actual shapes of the curve can be found online.
Saturday, October 22, 2016
Economics: The Public Sector
Difficulty: 3/3 (It is difficult to cleanly define the four types of goods)
Review: 3/5 (Some of the examples they give for the four types of good are hard to grasp)
Everything we have learned up to this point is just the private market. What if something was free though? The private market wouldn't be able to make itself efficient. Thus, government policy can potentially save the market by deciding the cost vs benefit.
Products are either excludable or not excludable. A good is excludable if people can be prevented from using this good. An example of an excludable good is toll roads, and an unexcludable good is like the environment.
Goods are also either rival in consumption or not. This means that someone having the good limits other's ability to have that good. Clothes are rivals in consumption while a cable TV show is not.
In this chapter, Mankiw discusses the non-excludable goods, called common resources if they are rival in consumption and public goods if they are not rival in consumption.
Public goods have a problem because there tend to be free riders, so the government can find ways to tax to pay for the costs of that public good. Examples include national defense, free knowledge (theorems, etc.), and fighting poverty. Governments use cost benefit analyses to determine the value of these goods.
Common resources are summed up in The Tragedy of the Commons. Sheep grazers raise too many sheep and the land becomes barren and unusable. This is because although the land was not excludable, it was rival in consumption because one grazer's use of the land limited the other's use. Other examples include clean air and water, congested roads, wildlife (like poached animals), etc. To solve this, governments can make taxes, regulate, give permits, or change the good into a private one by making it excludable.
Whew, this chapter has a lot to tell.
Review: 3/5 (Some of the examples they give for the four types of good are hard to grasp)
Everything we have learned up to this point is just the private market. What if something was free though? The private market wouldn't be able to make itself efficient. Thus, government policy can potentially save the market by deciding the cost vs benefit.
Products are either excludable or not excludable. A good is excludable if people can be prevented from using this good. An example of an excludable good is toll roads, and an unexcludable good is like the environment.
Goods are also either rival in consumption or not. This means that someone having the good limits other's ability to have that good. Clothes are rivals in consumption while a cable TV show is not.
In this chapter, Mankiw discusses the non-excludable goods, called common resources if they are rival in consumption and public goods if they are not rival in consumption.
Public goods have a problem because there tend to be free riders, so the government can find ways to tax to pay for the costs of that public good. Examples include national defense, free knowledge (theorems, etc.), and fighting poverty. Governments use cost benefit analyses to determine the value of these goods.
Common resources are summed up in The Tragedy of the Commons. Sheep grazers raise too many sheep and the land becomes barren and unusable. This is because although the land was not excludable, it was rival in consumption because one grazer's use of the land limited the other's use. Other examples include clean air and water, congested roads, wildlife (like poached animals), etc. To solve this, governments can make taxes, regulate, give permits, or change the good into a private one by making it excludable.
Whew, this chapter has a lot to tell.
Saturday, October 15, 2016
Economics: Externalities
Difficulty: 2/3 (Graphs are a bit hard to grasp, other than that, easy concepts)
Review: 4/5 (Externalities are reviewed well in this chapter, but graphs are not explained as well)
We return to the Ten Principles of Economics for this chapter, where we discuss how externalities cause market failure. An externality, whether positive or negative, is when the market doesn't take into account the affects of transactions on bystanders. An example of a negative externality is like pollution, and a positive one is technology spillover.
Since externalities cause market failures, there has to be solutions. One type of solution is the private solution, where people trade or make contracts, as stated in the Coase theorem to satisfy each other. This doesn't always work due to transaction costs (translators, lawyers, etc.)
The government can also make solutions. There can be Command-and-Control by regulation, like only allowing a certain amount of pollution to be legal. There's also Market-Based like using corrective taxes/subsidies, so parties get to decide what is efficient to them for a price. Another Market-Based policy is permits, where people trade rights to continue these externalities, e.g. tradable pollution permits.
All in all, a free market sometimes will not work out due to these externalities. Fortunately, suppliers, consumers, and the government can help to solve them.
Review: 4/5 (Externalities are reviewed well in this chapter, but graphs are not explained as well)
We return to the Ten Principles of Economics for this chapter, where we discuss how externalities cause market failure. An externality, whether positive or negative, is when the market doesn't take into account the affects of transactions on bystanders. An example of a negative externality is like pollution, and a positive one is technology spillover.
Since externalities cause market failures, there has to be solutions. One type of solution is the private solution, where people trade or make contracts, as stated in the Coase theorem to satisfy each other. This doesn't always work due to transaction costs (translators, lawyers, etc.)
The government can also make solutions. There can be Command-and-Control by regulation, like only allowing a certain amount of pollution to be legal. There's also Market-Based like using corrective taxes/subsidies, so parties get to decide what is efficient to them for a price. Another Market-Based policy is permits, where people trade rights to continue these externalities, e.g. tradable pollution permits.
All in all, a free market sometimes will not work out due to these externalities. Fortunately, suppliers, consumers, and the government can help to solve them.
Saturday, October 8, 2016
Economics: The Costs of Taxation
Difficulty: 1/3 (Talks about the application of concepts discussed in earlier chapters)
Review: 5/5 (Mankiw does a great job of providing real world examples of the discussion of tax)
Earlier, the book described the detrimental effects of taxes, shrinking the market and reducing efficiency. But taxes are necessary for funding education, enforcement, and more.
Now, we learn how to measure the benefits and losses from the tax. The money the government gets is called tax revenue, the area of the rectangle with a height equivalent to the size of the tax and a width equivalent to the quantity demanded after the tax. Of course, since the market shrinks, total surplus is also reduced; the amount of total surplus lost is known as the deadweight loss of tax, represented by the triangle with the three points: the equilibrium, the price buyers pay, and the price sellers receive.
The deadweight loss occurs because some buyers are discouraged by the increased cost from the tax. The size of the deadweight loss is affected by the elasticities of supply and demand, and the size of the tax.
The Laffer curve represents the shape of the tax revenue as tax size increases. This concept sparked much debate in the United States as government policymakers wondered if they were taxing too much and discouraging labor or taxing too little to provide the government more revenue for helping the nation.
Review: 5/5 (Mankiw does a great job of providing real world examples of the discussion of tax)
Earlier, the book described the detrimental effects of taxes, shrinking the market and reducing efficiency. But taxes are necessary for funding education, enforcement, and more.
Now, we learn how to measure the benefits and losses from the tax. The money the government gets is called tax revenue, the area of the rectangle with a height equivalent to the size of the tax and a width equivalent to the quantity demanded after the tax. Of course, since the market shrinks, total surplus is also reduced; the amount of total surplus lost is known as the deadweight loss of tax, represented by the triangle with the three points: the equilibrium, the price buyers pay, and the price sellers receive.
The deadweight loss occurs because some buyers are discouraged by the increased cost from the tax. The size of the deadweight loss is affected by the elasticities of supply and demand, and the size of the tax.
The Laffer curve represents the shape of the tax revenue as tax size increases. This concept sparked much debate in the United States as government policymakers wondered if they were taxing too much and discouraging labor or taxing too little to provide the government more revenue for helping the nation.
Tuesday, October 4, 2016
Economics: Consumers, Producers, and the Efficiency of Markets
Difficulty: 1/3 (Very little confusing opposite concepts like normal vs. inferior, etc.)
Review: 3/5 (Repetitive for a chapter, felt like the chapter was too simple to really be a chapter)
The chapter starts off with the simple concept of 'willingness to pay', all in the name really. It's how much the buyer values the good, at a certain price, the buyer won't be willing to buy it any more. Since the price drifts towards the equilibrium, the buyer's purchase price is often going to be below the buyer's maximum (willingness to pay value). Mankiw now introduces consumer surplus, the difference of the willingness to pay to what the buyer actually pays- this means the greater the consumer surplus, the better deal the buyer thinks they get.
Mankiw uses staircase graphs to show this, but to put in terms more mathematically, one can envision integrals as learned in calculus, where the x-axis can be represented by the equilibrium price line and the integral represents the area between the sloping demand and the price. Mankiw only uses rectangular staircases to demonstrate small scale examples of this as to simplify the explanation.
Lower prices will not only benefit new consumers now willing to pay but initial consumers save more as well.
There is also producer surplus which corresponds to cost and willingness to sell, really the same explanation as the consumer surplus except instead the surplus area is above the upwards sloping supply curve.
Higher prices will not only benefit new suppliers but also benefits initial suppliers who now ear more as well.
Again, the book demonstrates the perfect free market where equilibrium once again triumphs with providing the best scenario with giving both buyers and sellers maximum surplus. But this will not always be the case, Mankiw notes, foreshadowing the coming complex chapters.
Review: 3/5 (Repetitive for a chapter, felt like the chapter was too simple to really be a chapter)
The chapter starts off with the simple concept of 'willingness to pay', all in the name really. It's how much the buyer values the good, at a certain price, the buyer won't be willing to buy it any more. Since the price drifts towards the equilibrium, the buyer's purchase price is often going to be below the buyer's maximum (willingness to pay value). Mankiw now introduces consumer surplus, the difference of the willingness to pay to what the buyer actually pays- this means the greater the consumer surplus, the better deal the buyer thinks they get.
Mankiw uses staircase graphs to show this, but to put in terms more mathematically, one can envision integrals as learned in calculus, where the x-axis can be represented by the equilibrium price line and the integral represents the area between the sloping demand and the price. Mankiw only uses rectangular staircases to demonstrate small scale examples of this as to simplify the explanation.
Lower prices will not only benefit new consumers now willing to pay but initial consumers save more as well.
There is also producer surplus which corresponds to cost and willingness to sell, really the same explanation as the consumer surplus except instead the surplus area is above the upwards sloping supply curve.
Higher prices will not only benefit new suppliers but also benefits initial suppliers who now ear more as well.
Again, the book demonstrates the perfect free market where equilibrium once again triumphs with providing the best scenario with giving both buyers and sellers maximum surplus. But this will not always be the case, Mankiw notes, foreshadowing the coming complex chapters.
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